The road to Utopia is the road to Hell. — Communism and socialism are the opiates of the intelligentsia. — The left, in its eternal and futile quest for "equality", is more than willing to abolish liberty and sunder fraternity.

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Does the CPI Understate Inflation?

A website called Shadow Government Statistics offers an alternative estimate of inflation. According to SGS, “methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.” (Related post, here.) According to a chart at the linked page, year-over-year inflation is now about 9 percent, as opposed to the official government figure of about 2 percent.

The claim by SGS has merit, and not only because the definition of inflation has shifted. Specifically:

Government spending (at all levels) rose by 6 percentage points between 1980 and 2009. (See the graph at this post.)

Most government spending is inherently inflationary.

The inherently inflationary nature of government spending can be grasped by considering the case where government spending is financed by taxes:

Suppose that in the absence of government the GDP of the United States would be, as it is today, about $15 trillion. (Actually, as I show here, GDP would be a lot more than today’s $15 trillion were government to do nothing more than provide defense and justice.)

Suppose, further, that a bunch of governors arrives on the scene one fine day to announce: “You Americans need our services, so we’re going to tax you $5 trillion in order to provide things that we want you to have.” About 20 percent of the $5 trillion — the money spent on defense and justice — will be of value to almost everyone because (among other things) it protects economic activity. But most of the things our governors wants us to have — a hodge-podge of programs and regulations — will be valued mainly by those governors (i.e., politicians and bureaucrats) and narrow constituencies. The hodge-podge of programs and regulations, along with our governors’ habit of taxing success, raises the real price of government to far more than the $5 trillion shown in our national income accounts.

Our governors’ “generous” confiscation of $5 trillion has the same effect as if the producers of $5 trillion worth of real (non-government) goods and services walk off the job. More accurately, it’s as if they walk off the job and begin to vandalize their capital (homes, commercial buildings, computer networks, etc.). Specifically, according to the chairwoman of Obama’s Council of Economic Advisers, tax increases have a multiplier effect of about 3 (i.e., every dollar of a tax increase yields a 3-fold decrease in GDP). Another economist estimates that the supply of labor declines by 1.9 percent in response to a 1 percent cut in wages (a tax is equivalent to a cut in wages). Even transfer-payment schemes (e.g., Social Security) have a negative economic effect because they penalize producers for the benefit of non-producers.

Despite the reduction in real output that accompanies government,our governors pretend that they are producing $5 trillion worth of services, so (1) they levy taxes for those services, most of which taxes fall on the productive sector, and (2) they pay the producers of government services (government employees and contractors) with those taxes.

In sum, government pays the producers of government services in “empty dollars,” which those producers then try to spend on real output. And so we have $15 trillion chasing $10 trillion worth of real goods and services.

That’s real inflation. No deficit spending necessary. And it happens every time our governors commandeer additional resources, thus widening the gap between what the productive sector could produce and what it actually produces.

What if government were to borrow the $5 trillion instead of imposing $5 trillion in taxes? Borrowing doesn’t change the outcome, just the way we get there. There is still $15 trillion chasing real output of $10 trillion.

Now, not all of that government spending is inherently inflationary. The protection of citizens and their property from foreign and domestic predators (defense and justice) is essential to economic growth and the orderly functioning of free markets. Government spending on defense and justice currently accounts for 8 percent of GDP, whereas government spending (at all levels) currently accounts for 36 percent of GDP. Let’s say, for the sake of argument, (1) that the “right” level of government spending is 10 percent of GDP (the level that obtained in the early 1900s), (2) that the 10 percent is funded by a system of taxes which isn’t punitive toward investors and entrepreneurs (e.g., a single, flat, tax rate), and (3) that the 10 percent is not accompanied by burdensome regulations. Even in the absence of punitive taxes and burdensome regulations, the increase in government spending from 10 to 36 percent of GDP caused prices to rise by 25 percent. Inflation of 25 percent, when spread over 80 years and more, may seem inconsequential. But it is real — real theft, that is.

Moreover, the growth of government spending has been accompanied by punitive taxes and burdensome regulations. As a result, real GDP is 68 percent below its potential. In other words, in the absence of the regulatory-welfare state, real GDP would be more than 3 times its present level.

Comments & Correspondence

Now that this blog is in hiatus, I have closed comments on all posts. If you wish to communicate privately, you may e-mail me at the Germanic nickname for Friedrich followed by the last name of the great Austrian economist and Nobel laureate whose first name is Friedrich followed by the 3rd and 4th digits of his birth year followed by the usual typographic symbol followed by the domain and extension for Google’s e-mail service — all run together.

On Liberty and Libertarianism

What is liberty? It is peaceful, willing coexistence and its concomitant: beneficially cooperative behavior.

John Stuart Mill opined that "the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others." But who determines whether an act is harmful or harmless? Acts deemed harmless by an individual are not harmless if they subvert the societal bonds of trust and self-restraint upon which liberty itself depends.

Which is not to say that all social regimes are regimes of liberty. Liberty requires voice -- the freedom to dissent -- and exit -- the freedom to choose one's neighbors and associates. Voice and exit depend, in turn, on the rule of law under a minimal state.

Liberty, because it is a social phenomenon and not an innate condition of humanity, must be won and preserved by an unflinching defense of a polity that fosters liberty through its norms, and the swift and certain administration of justice within that polity. The governments in and of the United States have long since ceased to foster liberty, but most Americans are captives in their own land and have no choice but to strive for the restoration of liberty, or something closer to it.

Who can restore liberty? Certainly not the self-proclaimed libertarians who are fixated on Mill's empty harm principle and align with the left on social norms. Traditional (i.e., Burkean) conservatism fosters the preservation and adherence of beneficial norms (e.g., the last six of the Ten Commandments). Thus, by necessity, the only true libertarianism is found in traditional conservatism. I am a traditional conservative, which makes me a libertarian -- a true one.

Notes about Usage

“State” (with a capital “S”) refers to one of the United States, and “States” refers to two or more of them. “State” and “States,” thus used, are proper nouns because they refer to a unique entity or entities: one or more of the United States, the union of which, under the terms and conditions stated in the Constitution, is the raison d’être for the nation. I reserve the uncapitalized word “state” for a government, or hierarchy of them, which exerts a monopoly of force within its boundaries.

Marriage, in the Western tradition, predates the state and legitimates the union of one man and one woman. As such, it is an institution that is vital to civil society and therefore to the enjoyment of liberty. The recognition of a more-or-less permanent homosexual pairing as a kind of marriage is both ill-advised and illegitimate. Such an arrangement is therefore a “marriage” (in quotation marks) or, more accurately, a homosexual cohabitation contract (HCC).

The words “liberal”, “progressive”, and their variants are usually enclosed in quotation marks (sneer quotes) because they refer to persons and movements whose statist policies are, in fact, destructive of liberty and progress. I sometimes italicize the words, just to reduce visual clutter.

I have reverted to the British style of punctuating in-line quotations, which I followed 40 years ago when I published a weekly newspaper. The British style is to enclose within quotation marks only (a) the punctuation that appears in quoted text or (b) the title of a work (e.g., a blog post) that is usually placed within quotation marks.

I have reverted because of the confusion and unsightliness caused by the American style. It calls for the placement of periods and commas within quotation marks, even if the periods and commas don’t occur in the quoted material or title. Also, if there is a question mark at the end of quoted material, it replaces the comma or period that might otherwise be placed there.

If I had continued to follow American style, I would have ended a sentence in a recent post with this:

What a hodge-podge. There’s no comma between the first two entries, and the sentence ends with an inappropriate question mark. With two titles ending in question marks, there was no way for me to avoid a series in which a comma is lacking. I could have avoided the sentence-ending question mark by recasting the list, but the items are listed chronologically, which is how they should be read.

This not only eliminates the hodge-podge, but is also more logical and accurate. All items are separated by commas, commas aren’t displaced by question marks, and the declarative sentence ends with a period instead of a question mark.